Gold Correction Likely Not Over

As I stated last week, I am waiting for the gold correction to end so I can increase my holdings of gold and gold shares. I don’t think we’re there yet.

Last Friday, the gold price soared $33 after the stinky jobs report released that morning. The thinking was that the Fed would not be raising rates and the dollar would therefore fall and gold’s correction would be over. And that is exactly what happened…for one day.

The Fed Funds Futures (FFF) immediately got to work discounting Fed rate hikes for both the June and July meetings. The FFF market was assigning a greater than 50% probability of a June or July Fed rate hike prior to Friday’s employment news. By the end of the day on Friday, the odds had fallen to roughly a 30% probability for a June or July Fed rate hike.

Since there are FOMC meetings scheduled for June and July but not for August, the performance of the August, 2016 FFF contract tells us the odds that the market is assigning to a Fed rate hike in both of the next two FOMC meetings. The chart shows that, in reaction to Friday’s weak employment data, the price of the August FFF contract rose by 0.09, which means its interest rate fell by 0.09%, from 0.54% to 0.45% (the interest rate implied by a FFF contract is 100 minus the price).

But on Monday, gold’s advance hit a wall just below the 50 dma. For the first time in weeks, GLD, the big gold ETF, actually sold a little gold. In her Monday speech, Chairman Yellen assured us that the poor jobs performance was transitory and the economy is stronger than it looks. This morning, gold is down a little, having completely lost its Friday mojo.

What happened on Friday? It’s starting to look like fool’s gold, a case of premature excitement. Open Interest on COMEX was up 3% on Friday indicating lots of new buyers came into the market after the price took off on an initial burst of short covering. Many of these buyers are now looking at losses.

I’m betting that the most likely real end to the gold correction is after the FOMC meeting on June 15 when Chairman Yellen downgrades the U.S. economy yet again. But as always, the key is just to watch the market and let it tell you when the correction is over.

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Who is Wayne Wile?

Wayne Wile is an international investment advisor with more than five decades of experience in wealth management. He has spent the majority of his career working with institutional and high net worth investors, seeking to mitigate risk while optimizing portfolio performance.

Wayne began work in the mailroom of a brokerage firm when he was 17 years of age and rose to a senior executive position. He was recruited for key jobs with several nationally recognized investment firms in Canada before striking out on his own.

Wayne’s methods as a trader are governed by simplicity and self-discipline. He says that losses are the children of greed and fear while profits are the spawn of patience and trend-following. “Time is always on your side. Let the market tell you what it wants to do and keep it company. Never chase an idea you think you have missed. There is always another one coming along.”

Wayne is especially opposed to sophisticated trading strategies that try to predict the future based on mathematical analysis of historical data. “These systems routinely destroy far more wealth than they create,” he says. “Only a highly intelligent, well-educated individual would be foolish enough to do this stuff. Successful traders need to stop analyzing and learn to listen to what the market is telling them every day.”

Wayne resides in the Cayman Islands but considers himself a citizen of the world.